I am a newbie to note investing and want to ask all you that invest what is the best way to hold title to the notes? Did you start a company? I currently don't have an IRA or solo 401K, but is that the best way to purchase? I want to make sure that I set this up the best way right from the start.
if you have personal savings that you wish to use to buy the note then you can't just set up SD IRA or Solo K and take the title to the note in your retirement account. Your IRA or 401k must be funded first and there are limits. You can certainly invest in a note with your IRA or 401k (myself as well as many of my clients did just that), but you must have money in your retirement account to do that.
I plan on starting slowly, so I was considering funding the max I can this year and next into a Solo 401K. I'm just not certain if this is the best way to hold the notes or if it is better to create a company and report the income from the investment as I go. Does it look strange to a borrower to find their note taken over by someone's IRA or is that common?
It is very common for IRA or 401k to hold a note. Depending on what your strategy is you may need to readjust your approach. Some of my clients who buy non-performing notes using their retirement accounts don't want the borrower to know that retirement accounts holds the note. Then LLC can be created that is 100% owned by IRA or 401k, which will in turn hold the title to the note.
If you are buying performing note or using your 401k to fund a flip - then there is no need to have additional entity.
If you do it in a tax-deferred account then you are not paying any taxes on the income your notes generates until later time. If you use Roth Solo 401k then all the income, gains and profits are tax-free!
You can also invest in notes in your own name as well. But all the income will be taxable in the year it is generated. So from the tax standpoint you may want to consider using your retirement funds to invest in notes and use your savings for buy-and-hold rentals which will provide you with additional tax advantages.
Hope this helps.
I agree with Dmitriy. SD retirement accounts are an awesome way to hold performing notes. I would not use if for non-performing investments unless you have checkbook control or have your retirement account fund a business entity.
Also, the borrower primarily interacts with your servicer, not you. They may see your name or your IRA/entity name show up on the TILA letter which goes out initially to inform them of the ownership change but that can be the extent of it unless you reach out to contact them directly for some reason.
All these are good ideas and suggestions.
Talk to a CPA that has note experience.
There are different tax stageties you can use
to minimize your tax bite.
If you borrow money to buy the note your
tax libility is different than if you use your own funds.
Most of our investors hold title to non-performing notes (or in a JV agreement with us) in an LLC. But talk to a CPA with note experience. I can offer some referrals as we have many investors. Good luck :)
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